Climate change will make the next global crash the worst
Late last month Indonesia was hit by a devastating earthquake and tsunami that left thousands of people dead and missing. This week the International Monetary Fund arrived in the country to hold its annual meeting on the island of Bali. On the day when the IMF issued a warning about trouble ahead for the global economy, the latest report from the UN’s intergovernmental panel on climate change said the world had only a dozen years left to take the steps necessary to prevent a global warming catastrophe. The message is clear for those willing to hear it: get ready for a time when economic failure combines with ecological breakdown to create the perfect storm.
Even without the added complication of climate change, the challenge facing the finance ministers and central bank governors gathered in Bali would be significant enough. The IMF has cut its forecast for global growth, but the chances are that next year will be a lot worse than is currently forecast. The risks, the IMF says, are skewed to the downside. You bet they are.
Here’s a brief checklist. For the past 10 years, the world economy has been surviving on a diet of low interest rates and money creation by central banks, but that stimulus is now being gradually withdrawn. In the United States, growth has been further pumped up by Donald Trump’s tax cuts for individuals and companies, but only temporarily. The impact will start to fade next year as higher interest rates start to bite. Trump is already berating the Federal Reserve, America’s central bank, for increasing borrowing costs.
In Europe, a colossal row is brewing between Italy’s populist government and the fiscal conservatives at the European commission because the budget proposed by Rome runs completely counter to the EU’s fiscal rules. Officials in Brussels are more worried about Italy than they are about Brexit, and with good reason. Italy’s banks are awash with bad debts and could not survive the sort of financial crisis that appears to be in prospect. It is a much bigger country than Greece, and far too big for Europe to bail out if the worst happens.
The standoff between Rome and Brussels is happening as Europe’s growth rate has started to slow. One reason is that its export-driven economies are already being hurt by the early skirmishes in Trump’s trade war. As the IMF noted this week, protectionism is a key risk to global growth.
China, the world’s second biggest economy, has always been Trump’s main target, and it has been affected by new US tariffs, as its domestic economy was already slowing. Elsewhere, in the past few months the IMF has been called in to help Argentina, there has been a run on the Turkish lira, and inflation in Venezuela threatens to hit Weimar Germany-style levels.
In better times, oil-rich Venezuela might have been well placed to benefit from the rising price of crude oil, which is heading steadily towards $100 a barrel. Every big recession in the global economy has been prefigured by a jump in the cost of crude, which makes it somewhat curious that share prices on Wall Street are so high. Traditionally, stock markets anticipate trouble, but the mood currently is to dismiss higher interest rates, rising oil prices, Italy and trade wars as somehow unimportant. Ominously, next year is the 90th anniversary of the Wall Street Crash. The Great Depression that followed that market meltdown led to new economic thinking. It spawned full employment policies, increased spending on welfare, and a new set of multilateral organisations.
Turn the clock forward to 2018 and the parallels are obvious. International cooperation has broken down, economic failure has damaged mainstream political parties, and belief in the invisible hand of the free market has been shattered. But the threat posed by global warming means the current crisis of capitalism is more acute than that of the 1930s, because all that was really required then was a boost to growth, provided by the New Deal, cheap money, tougher controls on finance and rearmament. In today’s context, a plain vanilla go-for-growth strategy would be suicidal.
Even so, there are countries that are prepared to self-immolate their economies in pursuit of growth at all costs. America is one. Australia appears to be another. At the other end of the spectrum are those who say there will be a future for the planet only if the idea of growth is ditched altogether. Politically, this has always been a hard sell, and has become even more difficult now that populations in the west have experienced an entire decade of flatlining living standards.
In the developing world, the problem has been too little growth rather than too much. Tackling global population growth is a no-brainer from a climate-change perspective, and most of the projected increase comes from low-income countries, most notably in Africa. The reason is simple: poor families have more children. Birthrates fall as countries become richer.
Between the two extremes are those who think the circle can be squared by carbon-free growth, made possible by the dramatic fall in the cost of renewable energy. Technology will ride to the rescue, they insist.
This sounds like a cost-free (or at least relatively cheap) option, and that’s why almost all politicians pay lip service to green growth. But then they act in ways that make achieving global warming targets harder – by building new roads and expanding airports. And always for the same reason: because doing so will be good for growth. This is called a balanced approach, but it is nothing of the sort. If the IPCC is even close to being right about its timeline, speeding up the transition from fossil fuels to renewables is vital.
Can that be done? One of the winners of this year’s Nobel prize for economics – William Nordhaus – says it can, if policymakers get serious about a carbon tax set high enough to price oil, coal and gas out of the market.
Here, though, the breakdown in international cooperation and trust becomes really damaging. Ideally, existing global institutions – the IMF, the World Bank, the UN and the World Trade Organization – would be supplemented by a new World Environmental Organisation with the power to levy a carbon tax globally. Even in the absence of a new body, they would be working together to face down the inevitable opposition to change from the fossil fuel lobby.
Instead, the response to climate change looks similar to the response to the financial crisis: fail to recognise there is a problem until it is too late; panic; then muddle through. That’s a sobering prospect.